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Start-Up Guide :: Contractor umbrella companies

Published on Jun 25, 2009 |

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Contractors typically work via their own limited companies, or via umbrella companies.

With the umbrella company model, you will be 'employed' via the umbrella scheme. You will sign a contract with the umbrella company, and another contract is signed between the umbrella and the end client.

A low-hassle option, once you have submitted your timesheet to the umbrella company, they will invoice the recruitment agency and take care of all payment issues. You will receive your income from the umbrella scheme net of PAYE, National Insurance contributions, and the umbrella company fees.

Unlike the limited company model, you don't need to deal with Companies House, accountants, and your administrative workload is much lighter. On the other hand, the limited company route is more tax efficient for contractors who are not caught by the IR35 legislation.

Contractors who are caught by the IR35 rules, are on particularly short term contracts, or don't want to deal with limited company administration, often favour the umbrella company route. You can read more in our limited or umbrella? guide.

Which umbrella company?

With hundreds of umbrella companies out there, contractors may feel daunted by the choice of suppliers.

You should take time before joining an umbrella company, and take a look at our 15 things to look out for when choosing a contractor umbrella company.

Aside from personal recommendations from existing contractors, which is probably the best indicator of how good a particular scheme is, you should consider other issues such as:

1) What are the umbrella company fees?
2) How often does the company make payments?
3) How long has the scheme been in operating?
4) Are there any joining/leaving fees?
5) Are there any other 'hidden costs'?
6) Does the scheme have an automated online service?
7) Are there any service guarantees?
8) Does the scheme offer any additional benefits?

Further resources

Unsurprisingly, we have dozens of useful articles elsewhere on Contract Eye which should help you find out more about how umbrella companies work, and how to choose the right scheme for you. You might also be interested in our growing list of contractor umbrella suppliers.

- Joining an umbrella company scheme.

- What is a PAYE umbrella company?

- Umbrella company fees - how much to pay